Deborah Tickle, Deputy Chair: SAICA National Tax Committee and Tax Partner at KPMG, explains that transfer pricing legislation was first inserted into South African tax legislation in 1995. “However, it was in 1999 that guidance was given as to what the legislation required and, even then, it was limited to what interest could acceptably be paid on loans from offshore connected parties.”
Tickle says this guidance, known as practice note 2 (PN2) introduced a thin capitalisation safe harbour rule, which advised that interest at a rate not exceeding prime plus 2% could be paid on financial assistance (i.e. a loan) from an offshore investor of up to three times the investor's fixed capital, without fear of reprisal. Thus, investors had certainty that provided that they stayed within these rules; they were complying with the South African tax authority's requirements.
“Over the years, due to changing accounting practices, it has become more difficult to determine what fell into the 'fixed capital' and 'financial assistance' parts of the safe harbour thin capital ratio, and calls were made to National Treasury for a revision of PN2 to clarify the latest position”, advises Tickle.
The legislation for transfer pricing was, however, overhauled and reintroduced during the course of 2012, and the changed legislation will affect the 2013 tax years of many groups. The new legislation does not contain a thin capitalisation requirement, and some taxpayers believe that PN2 is no longer relevant. The South African Revenue Service (SARS) has not withdrawn PN2 and, despite indications that new guidance has been in the process of being prepared, nothing has been issued. This leaves the South African taxpayer, who is a party to such loans, in a quandary as to what to do.
“Should SARS look to international guidelines to determine what level of interest will be acceptable? If it does so, will it be satisfied with this approach? Does the fact that PN2 has not formally been withdrawn, and no alternative guidance offered, mean that SARS expects the 3x fixed capital rule not to be exceeded? On the other hand, if the taxpayer applies the 3x fixed capital rule, in line with PN2, will this continue to provide the security that the requirements have been complied with”, Tickle questions.
She maintains that this lack of certainty as to what rules are acceptable to comply with, as symptomatic of a number of problematic areas of our legislation. Since certainty is one of the basic principles on which tax legislation must be built, it is a serious flaw in the current transfer pricing, since taxpayers need to know how to make sure they are paying the right amount of tax, to satisfy the transfer pricing legislation. “Not knowing what to do leave taxpayers who want to do the right thing in the uncomfortable position that they don't know what the right thing is.”
Transfer pricing rules always involve international participation. Thus, if South Africa wants to attract investment the rules must be clear, according to Tickle
“In the interim, it is to be hoped that SARS will not penalise taxpayers who take a reasonable decision to either follow international guidelines or follow PN2. Taxpayers should not be made to pay for shortcomings in legislation or the guidance thereon”, says Tickle.
